Wednesday, July 19, 2017

Nickel-and-dime charges soar; airlines continue race to the bottom

A new study shows the 10 airlines that derived the most so-called ancillary revenue derived more in 2016 than ever before: a total of more than $28 billion, and more than 13 times the amount earned nearly 10 years ago.

For the report sponsored by Cartrawler, IdeaWorksCompany reviewed the financial information of 138 airlines worldwide, 66 of which reported financial data directly related to their ancillary revenue. It then reported the results in three ways: total ancillary revenue in dollars, ancillary revenue as a percentage of total revenue, and revenue per passenger.

While often associated with the widely criticized “nickel-and-dime charges” levied by many airlines, “ancillary revenue” actually comprises five different categories: à la carte features, commission-based products, frequent flier activities, miscellaneous sources such as advertising, and the à la carte components associated with a fare or product bundle.

The report shows that the Big Three U.S. airlines took in almost $16.3bn in ancillary revenue in 2016, though approximately half that amount came from the sale of frequent flier miles, with a big chunk coming from the banks that issue co-branded affinity credit cards. Those banks buy the miles from the airlines, then distribute them to the customers who hold the affinity cards.

By airline, United (NYSE:UAL) pulled in the most, at $6.22bn, with $3.26bn coming from à la carte services such as checked bag fees and travel retail commissions. Delta Air Lines (NYSE:DAL) realized $5.17bn total with $2.48bn from à la carte fees, while American (NASDAQ:AAL) took in $4.9bn total, with $2.79bn coming from those fees.

The only other U.S. airline on the list was Southwest (NYSE:LUV), which took in $2.82bn total, though 80 percent of that came from activities related to its frequent flier program.

“The importance and prevalence of ancillary revenue continues to move forward with an even larger footprint on airline financial statements and the products offered to consumers,” according to the report.

So important, in fact, that some analyses credit ancillary revenue for returning the U.S. airline industry to profitability. The industry as a whole lost $54bn from 2000 to 2009, according to U.C. Berkeley economist Severin Borenstein.

In 2007, the year of the first report on the topic of ancillary revenue, the 10 airlines that earned the most generated $2.1bn from those various sources. In 2016, that figure had soared to more than $28bn, or an increase of more than 1,300 percent.

"Lies, damned lies and statistics"

For some airlines, “ancillary revenue” has become a significant portion of their revenue stream. Ultra-low fare carrier Spirit (NASDAQ:SAVE) is the poster child of that segment of the industry and continues to be the airline deriving the largest percentage of total revenue from ancillary sources. In 2016, it derived 46.4 percent of total income from those sources, up from 43.4 percent in 2015 and nearly 39 percent in 2014.

Spirit was followed by Frontier (NASDAQ:FRNT) and Allegiant Air (NASDAQ:ALGT) in the U.S., which derived 42.4 percent and 40 percent, respectively, from ancillary sources. Nos. 4 through 10 were all non-U.S. carriers.

Top 10 carriers' ancillary revenue per passenger
Overall figures can be interesting and illuminating but, for the air traveler, the question is simply, “What does this mean to me?” The answer depends on which carrier you will be flying.

While the Big Three U.S. carriers pulled in the highest total amounts, ancillary revenue had the greatest impact on Spirit’s passengers, who paid the most on a per-passenger basis. On average, $49.89 paid by each passenger was directly the result of ancillary charges from the range of sources. Allegiant was second at $48.39 and Frontier was third at $48.60. United Airlines’ passengers paid the fourth highest in ancillary charges, at $43.46 per passenger, while those who flew Alaska Air Group (NYSE:ALK) airlines Alaska, Horizon and Virgin America paid an average of $31.41.

The full report is available here.

My take

Although ancillary revenue may be a boon to airlines, my experience is that most passengers find à la carte charges annoying in the extreme. Most of those I talk to while traveling complain of being nickel-and-dimed, though I seldom fly low-cost or no-frills carriers. That may well be the line of demarcation, and the report hints that my take may be correct.

Passengers who fly no-frills airlines may well anticipate, and even accept, being charged for this, that and the other, but that is less the case with those who choose more traditional carriers.

“American, Delta, and United recently introduced basic economy fares (sometimes called seat-only fares) to compete with Frontier and Spirit,” the report noted. “These fares reduce the product to a minimalist experience with fees charged for bags and early seat assignments, no elite upgrades, and a ban on flight changes. Yet when presented with higher fare, better service options, the majority of consumers opt to spend more.” (emphasis added)

In other words, those passengers are not willing to accept a “bare-bones” approach and are willing to pay more. So why do traditional carriers continue to emulate their no-frills counterparts?

There are economy, standard and exotic cars. There are budget, average and luxury hotels. There are fast food outlets, quick-serve restaurants, sit-down restaurants like Denny’s and fine-dining, white-table-cloth establishments. Consumers of virtually any other commodity have a range of options from which to choose; why airlines all feel they must pander to the lowest common denominator is quite beyond me.

The report’s authors say, “Challenges faced by the world’s economy reinforce the need for airlines to rely upon ancillary revenue as a tool to serve the needs of consumers and investors.”

I say, “Bull,” and view the report’s comments on the Big Three’s experience selling basic economy fares as an important, if buried, acknowledgement.

Certainly, there are things that arguably should be à la carte such as in-flight meals and alcoholic beverages, use of Wi-Fi and in-flight movies. But I still chafe at having to pay to check a bag, I bristle when an airline wants to charge me to reserve my seat in advance, and it makes me absolutely furious that different fees apply to reserve different seats within the same class. I see that as greed, pure and simple.

To some extent, travelers can vote with their dollars, though there is little meaningful difference across the industry in the U.S. Southwest hits passengers with the fewest add-on charges but offers only slightly more space than American, Delta, United or Alaska. jetBlue and, for the moment, Virgin America offer more space but still charge for checked bags in some fare categories.

Each of us must determine what is most important to us and choose accordingly. However, the days of finding an all-inclusive fare for a comfortable seat in the main cabin on a carrier that delivers excellent service seem to be behind us. And I think that’s a shame.

Visit my main page at TheTravelPro.us for more news, reviews, and personal observations on the world of upmarket travel.



Photo by Carl Dombek; graphic provided by IdeaWorksCompany
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